Student Loans

You Need a College Degree Just to Understand the Financial Aid Packages

Students that apply to college often anguish over the admission’s applications. They are often confused and intimated by the amount of information each application requires. But, compared to financial aid packages, the admissions application is no more difficult than a coloring book.

The lack of clarity and transparency in student loan information is costing the government and students money. The rate of default among the nation’s 36 million higher education borrowers continues to grow.

President Obama is concerned about this situation and on June 7, 2012 issued an executive memorandum to make it easier to understand student loan repayment plans.

The reason for the executive memorandum may stem from various issues:

  • More students than ever will be applying for student aid. Fully 2/3 of college students will take out student loans. There is a fear that as the number of borrowers goes up so will defaults.
  • The executive order specifically deals with the Income Based Repayment Plan, an option for student loan repayment based on income. The program caps monthly repayments at no more than 15 percent of disposable income. By 2014 the maximum amount will be 10 percent of disposable income. Additionally, the president included language that will forgive the participants in the program the balance of their loans five years earlier, after 20 years of regular payment rather than the present 25 years.
  • Senator Al Franken (D –Wisconsin) recently introduced a bill that got bipartisan Senate support. On May 24th it was referred to the Senate Committee on Health, Education, Labor, and Pensions.  The title of his bill is: “Understanding the True Cost of College Act”. It seeks to standardize the language of award letters regarding financial aid to students. As things stand now, some colleges and universities financial aid packages include student loans but never use the word loan. The bill’s future is uncertain.

The President’s memorandum to Secretary of Education Arne Duncan calls for streamlining the entire Income Based Repayment Program so that there will be more participation and fewer defaults. Recently, Duncan said that most borrowers “will be able to electronically import data from the Internal Revenue Service onto their application, letting them complete the application at one sitting without going through their loan servicer.” Duncan added the new method would encourage enrollment in the Income Based Repayment Program and forestall “a significant percentage of defaults.” Under the terms of the memorandum Duncan and the IRS had until September 30, 2012 to make this possible – they are ahead of schedule.

To address the issue of understanding costs, the Department of Education and the Consumer Financial Protection Bureau announced last October that they are creating an easy to understand model financial aid form, but its use will not be mandatory unless Congress votes to do so. That was the point of the Franken bill.

Bottom Line: With or without Congress, the president will make it easier to understand, apply for and repay government student loans as part of the a student’s financial aid package.